Bracing the brunt of challenges
As of now world population is around 6.5 billion. Among this around 61 percent, i.e., 3.96 billion live in Asia. Generally 50 percent of the population in the Asian continent is living below poverty line, i.e., around 1.98 billion individuals and around 440 million families (family size 4.5). We can easily understand what a large number of the poor families are living in the world!
Though the process of poverty in the world is the outcome of a complex and interacting set of factors rooted in the broad structure of the society, poverty involves wider aspect of deprivations, which are not limited to purchasing power alone. Yet for a working solution NGO/ MFIs should consider the factor which is directly linked and most critical in relation to poverty. Increased income can enable one to take care of the needs gradually. As increase of income of an individual is directly related to poverty reduction hence it should be given priority in all poverty reduction attempts. Income can be increased in two ways (i) employment creation and (ii) self -employment creation.
For all latest news, follow The Daily Star's Google News channel. Employment is created by private and public sector according to their needs. Employment creation needs huge amount of capital; whereas overall economy of a given country should justify profitable enterprises for production, consumption and service industries. Government can create job for providing services from the revenues generated and or by borrowing from bilateral/multilateral bodies.
As job creation in a developing country is very difficult and needs gradual process, hence creating self-employment is another way to solve this burning problem. Self-employment creation needs small amount of capital as the entrepreneur himself/herself has the initial capacity to start small economic activities that has demand in the local market. Self-employment facilities can be created either by own capital or by borrowing from financial institutions. But vast number of people lack scope of borrowing from institutional credit sources.
The banking sector needs collateral for lending. Again lending small amounts is not profitable for the general banks. Banks operate in a manner, which is rather not friendly to the poor and the illiterate. Banks are of two categories, one is government-owned and the other, privately owned.
Government officials under certain guidelines manage government banks. In the developing countries they also create some guidelines of their own. Where resources are scarce, many people are in queue to take advantage. With this advantage, often rent seeking and bribing get associated with transactions. Moreover, government bank staff are permanent in services; they get their salary and promotion whether they work profitably or not. Private banks are providing most benefits to the owners and offering services to well off clients. They are not interested in micro-credit still now in a substantial manner.
Under this scenario in Asia, poor people are not getting expected loan facilities from the formal financial sector.
As there is lack of institutional credit facilities, most poor people either borrow from moneylenders, co-operatives and from NGOs/MFIs. Moneylenders lend money at an exorbitant rate of interest. Co-operatives have an inherent weakness for efficient delivery of financial services in many developing countries. NGOs/MFIs are also facing constraints either of capacity or of sufficient resources.
A section of people willing to involve in self-employment creation suffer from lack of capital as well as lack of collateral for borrowing from formal financial institutions. For them collateral free micro credit is the essential weapon to fight against poverty. NGOs/MFIs emerged for solving the credit need without collateral and with service delivery at the doorstep of the poor, but not without constraints. However, the millennium development goal has been targeted to cover 200 million poorest families under micro credit operation by 2015. Although the magnitude of the problem is quite big, roughly 66.6 million poor households had already been covered by micro-credit within 2004 (Micro-credit Summit Campaign report 2005).
The major challenges in Micro finance are: (a) Rapid growth (covering vast numbers), (b) Cost-effectiveness (financial sustainability) -- serving the poor in sustainable manner, (c) Covering the hardcore poor. To meet these challenges micro finance sector needs broadly four factors to take hold: (i) Firm determination of the leadership, (ii) Innovative methodology, (iii) Friendly, hassle-free sources of fund, and (iv) Enabling environment.
Firm determination of the leadership: As micro finance operation started to serve the poor we saw a few leaders founding their institutions with commitment, dedication and in non-conventional manner. Few of them came from formal sector and started to establish organisations from grassroots and ensured step-by-step growth. They successfully demonstrated providing financial services to the poor.
During the journey NGOs/MFIs' growth was not exponential. Some of them could not cover the cost from the income. Hence dependency remained with very cheap source of fund along with grant component. This step is also a milestone for micro finance from where attempts have been made to attract borrowed fund, reduce costs and increase revenue through improving efficiency as well as changing relationship with funding mechanism. Leadership determination and demonstration of reasonable sources can take off dependency from grant to borrowing from apex bodies including commercial bank. These initiatives demanded new types of relationship with new types of funding mechanism, which have been properly managed by NGO/MFI leaders.
Innovative methodology: Tiny amount of loan to large number of borrowers at their doorstep is a costly operation compared to revenue income. Cost reduction is also an essential element in micro finance operation. Reducing cost can be possible either by offering larger loan size or by innovating non-conventional management which is less costly. ASA took an innovative management in micro finance operation reducing cost of lending from 15 percent to 3 percent within three years. The essences of innovative management are as follows:
(i) Specialised operation. (ii) Documentation of essential information only. (iii) Simple product, simple loan application and verification process. (iv) Staff recruitment in non-conventional manner and on-the-job training (each one teaches one). (v) Simple standard loan register along with ledger and cash book, abandoning the bookkeeper/cashier and standard furniture, fixture; and collective use of facilities in the office. (vi) Branch level financial planning with decentralised branch structure. (vii) Strong monitoring from mid and head office. (viii) Written manual.
Presently, ASA covers 5.99 million members through 2300 branches with 15,000 staff members with annual disbursement of Tk.3,000 crore.
Friendly hassle-free source of funding: Friendly hassle-free source of funding is essential for micro finance institutions to function and grow. Sources of funds are:
(i) Donor agencies grant (charitable), (ii) Multilateral bodies like WB, ADB, IFAD concessional loan fund through Govt. to Apex for channelling to NGOs/MFIs, (iii) Savings from the members, (iv) Commercial bank linkage with NGOs/MFIs, (v) Transformation of NGO/MFI from 'not-for-profit' to regulated financial institution under profit section, (vi) Equity/debt from international investment fund.
All such sources are not without constraints and limitation. Grant from donor agencies is not a suitable funding mechanism for the growing entity. This can help start an organisation at initial stage.
Multilateral bodies' channelling of funds depends on the bodies as well as government of respective country. When both agree along with existence of a vibrant micro finance sector, it works. Bangladesh, the Philippines and Pakistan are under such arrangement. There are some sort of apex funding available in India, Nepal and Sri Lanka also.
Commercial bank linkages with NGOs/MFIs are visible recently in India. Most prominent is ICIC Bank. Commercial bank linkage with NGOs/MFIs is also playing a role in Bangladesh and the Philippines.
Transformed NGOs/MFIs are attracting fund in India from banks and investors and in the Philippines from apex body, banks and mobilising savings from public.
Equity/debt providing to MFIs by international investment fund is very recent happening in micro finance sector. Both equity and debt from international investment fund have been associated with several constraints in several countries.
Enabling environment: Favourable environment for micro finance in different manners are prevailing in most developing countries. Such environment also among general public, civil society, media and various institutions within the country is needed for favourable growth of micro finance for poverty reduction. Though government is favourable in general to micro finance in many countries but specific modalities of NGOs/MFIs determine the nature of its being favourable.
Social impact: Social impact of micro finance is not questioned nowadays. Globally it has been again and again proved that access to financial services helps the poor to increase their income. As micro finance clients are overwhelmingly women hence micro finance improves the empowerment process in the family and society at large. Political empowerment at the grassroots level has also been visible. Due to the increase in income the poor are sending their children to school, their housing condition has also been improving, they are visiting doctor, increasing food intake. Pure drinking water and sanitation situation has also been improving.
Still the fact remains that the process is slow and vast numbers are still under poverty line along with a section at the bottom yet to be covered.